Deutsche Telekom Sacrifices Dividend for Investments

By Cornelius Rahn -
Dec 7, 2012

Deutsche Telekom AG (DTE), Germany’s
largest phone company, is stepping up investments in the U.S.
and its home market for faster networks to tap demand for new
data services, resulting in a lower payout for shareholders.

Capital expenditure will total almost 30 billion euros ($39
billion) over the next three years, including an 18 percent
increase to 9.8 billion euros for 2013, the company said
yesterday. Analysts had projected 8.5 billion euros in spending
for that year, according to data compiled by Bloomberg. Deutsche
Telekom said the outlays will help it return to sales and profit
growth in 2014.

Faster networks are key for carriers as consumers flock to
smartphones such as Apple Inc. (AAPL)’s iPhone and handsets based on
Google Inc. (GOOG)’s Android system to download music, watch videos
online and surf the Web. Deutsche Telekom’s move may pay off if
the company uses the savings for the right investments, said
Oddo & Cie. analyst Alexandre Iatrides.

“A few years ago, such network investments would have been
seen as mainly defensive and value destructive,” he said. “But
now this capex could add some value in the longer term.”

Deutsche Telekom fell 2.6 percent to 8.35 euros at 9:09
a.m., taking the decline to 5.8 percent this year and giving the
company a market value of 35.9 billion euros.

U.S. Focus

Deutsche Telekom Chief Executive Officer Rene Obermann
yesterday outlined the company’s three-year business plan to
investors in Bonn to convince them that the carrier can pay a
steady dividend and finance network investments even as phone
revenue in Europe declines amid the region’s debt crisis. Peers
including Telefonica SA (TEF), Royal KPN NV and France Telecom SA (FTE) have
slashed or even completely scrapped their dividend plans.

The meetings between Deutsche Telekom executives and
investors continue today.

Deutsche Telekom will make the bulk of its investments --as
much as $4.8 billion -- in the U.S. next year as the company
speeds up the deployment of a faster network and works to
complete a merger of its T-Mobile USA unit with MetroPCS
Communications Inc. (PCS) The division, which has seen its customers
defect to AT&T Inc. (T), Verizon Wireless and Sprint Nextel Corp. (S),
said yesterday it reached an agreement to begin carrying Apple
products in 2013.

“The most important game changer for next year is the
U.S.,” Obermann said yesterday. “We believe we can get back to
growth.”

Deutsche Telekom last year failed to sell T-Mobile USA to
AT&T for $39 billion as regulators opposed the deal, saying it
would harm consumer interests. The deal with MetroPCS is
expected to be completed in the second quarter of next year.

Dividend Reduction

The planned dividend reduction, the first in three years,
means investors in Deutsche Telekom will receive a per-share
dividend of 50 euro cents for each of 2013 and 2014. That’s a 29
percent cut from the 70 cents pledged for this year.
Analysts predicted 60 cents for each of the next two years, data
compiled by Bloomberg showed.

“We compare favorably against our peers and our
shareholder returns are above average” even after the
reduction, Obermann said.

Adjusted Ebitda will drop to about 17.4 billion euros next
year from 18 billion euros in 2012, excluding MetroPCS, Deutsche
Telekom said. The company projects revenue and adjusted Ebitda
to return to growth starting in 2014.

To boost profitability, Deutsche Telekom is also reviewing
additional job cuts, two people with knowledge of the matter
said this week, asking not to be identified because the
discussions are private.

Job Cuts

Chief Financial Officer Timotheus Hoettges wants to reduce
the number of staff that perform internal control functions such
as measuring business processes, said one of the people.
Deutsche Telekom also plans to further lower the number of
external service personnel in 2013, another person said.

The future of EE, Deutsche Telekom’s U.K. wireless venture
with France Telecom, is under strategic review, Obermann said.
France Telecom CEO Stephane Richard said in an interview last
month that the Paris-based company has received interest from
private-equity firms seeking a minority stake in the 50-50
venture, and may also consider an initial public offering of the
unit.

EE may be valued at 7 billion pounds ($11 billion) to 7.7
billion pounds, based on a multiple of 5 to 5.5 times its
earnings before interest, taxes, depreciation and amortization,
according to estimates last month by Stephane Beyazian, an
analyst at Raymond James Euro Equities.

Cable Rivals

Deutsche Telekom is also stepping up investments in its
home market.

The operator last month announced plans to deliver faster
Internet connections to 24 million customers in Germany in the
next four years to better compete with cable operators including
Kabel Deutschland Holding AG (KD8) and Liberty Global Inc. (LBTYA)’s
Unitymedia KabelBW. The move may help the company edge out non-
cable fixed-line operators in the country and charge higher
prices, Iatrides said.

“When Telefonica cuts its dividend, it’s for financial
reasons because they’re in trouble,” he said. “Deutsche
Telekom does it not because of earnings degradation but for
operational reasons.”